Rate cut policy fails to deliver

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No respite for most firms still stuck with high interest payments on existing loans

 
Employees count money at a bank in Hanoi. Analysts said many banks have sought ways to avoid offering customers lower rates on existing loans, despite a recent central bank's order.

The central bank's move to have interest rates on existing loans reduced to below 15 percent is rational and necessary, but most firms are yet to benefit from it.

In fact, they are feeling somewhat cheated after the policy raised hopes of some immediate respite. Analysts, meanwhile, say that this reflects the large time gap that often exists between policy declarations and practice in Vietnam, which, in turn, means that targeted objectives may not be achieved.

Lenders have to cut rates on existing loans to companies to below 15 percent from July 15, central bank governor Nguyen Van Binh told a banking conference in Hanoi early this month. In the last few months, commercial banks have been offering new loans at rates of 13-17 percent. Late last year, the rates were over 20 percent.

The monetary authority also directed lenders to prioritize lending to strategic sectors such as small enterprises.

"We should aim to help companies that still have the potential to develop," Binh said. Commercial banks need to be determined and quick in reducing lending rates to help companies, he added.

Former central bank governor and current chairman of the Vietnam Association of Small- and Medium-Sized Enterprises, Cao Sy Kiem, said: "The rate cut is a rational policy. It can help firms cope with difficulties and reduce the risk of bad debts."

However, it is not easy to implement the policy, Kiem said, adding that the central bank should issue instructions on its implementation.

"Without specific instructions, policies would not be implemented effectively. We have seen this from previous rate cuts. Although the central bank asked lenders to reduce lending rates, firms could not immediately access loans at the new rates," Kiem said.

Vietnam's bad debt rose to 8.6 percent of total loans in the banking system at the end of March, according to the central bank.

Many firms are complaining that their existing loans are not enjoying the new rate cut ordered by the central bank.

Tran Thi Hong, director of electric home appliances trader Phuong Hong, said her firm is still paying 16-17 percent a year on its existing loans.

"No bank has agreed to reduce rates on our existing loans. They say they are considering it, but are waiting for specific instructions from the central bank."

Meanwhile, some firms cannot access the new rate because they fail to meet the requirement that their loans should be assessed by the lenders as being repayable on schedule.

Kiem said the requirement has meant that many firms in difficulties are left out by the new policy, which only targets firms "with good business."

Pham Chi Cuong, chairman of the Vietnam Steel Association, said most of the association's small members are still paying 17-18 percent interest on their existing loans.

To enjoy the new rates, firms must demonstrate profit making ability, but this is difficult because most steel producers have been suffering losses since early this year, he said.

Analysts said many banks, especially small ones, have sought ways to avoid offering customers new rates on their existing loans, as they had to raise funds at high interest rates previously.

The director of a Hanoi-based branch of a commercial bank said his bank has started to reduce rates on existing loans since July 14, but it has a large number of customers, so it needs more time to examine their contracts.

Lenders will have difficulties in cutting rates on existing loans immediately because the central bank has reduced borrowing costs faster than expected, said Le Hung Dung, chairman of Vietnam Export-Import Commercial Joint-Stock Bank. "Banks are also companies which have to ensure profitability for its investors," he said.

Banks' earnings may drop after the rate reduction since they've had to attract funds at high interest rates previously, Kiem said.

"Lenders will have to accept some profit reduction in order to help companies overcome difficulties. They will not be able to recoup capital if firms go bankrupt," Kiem said.

"Some small banks that raised funds at high very interest rates previously could even suffer losses now."

Phan Huy Khang, general director of Sacombank, said the new rate would cut his bank's profits by VND80 billion ($3.8 million) per month. The bank's outstanding loans are around VND26 trillion, he said.

Kiem also said that the rate cut on its own is not enough to help firms recover, because many of them have not taken out new loans to expand production and business for a long time amidst the economic slowdown. The government should take other measures to help them overcome the tough situation, he said, but did not elaborate on what these would be.

Vietnam's economy expanded 4.66 percent in the three months to June from a year earlier, and Deputy Prime Minister Vu Van Ninh said Saturday. It may miss its 6 percent target this year, given the worsening debt crisis in Europe and a growth slowdown in China.

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